Britain's Withdrawal from the EU (Brexit)

The decision of the British people to withdraw from the European Union will exacerbate the opaque and uncertain outlook for the global economy. I regard this as a serious matter. Brexit might cause the UK economy to shrink by 1.4—5.6% in the short term, and the global economy to contract by 0.1—0.3%. The impact will extend beyond the UK to affect the entire world, including Japan. There are also concerns that it will affect not only economics, but also a wide range of other fields including politics, security, and anti-terrorism measures. Moreover, Brexit has even cast doubt over the basis of the EU's existence.

Anti-globalization trends such as nationalism, protectionism, and isolationism lie behind the decision made in the UK, and I fear that these tendencies could spread through the international community. Recognizing that Brexit has created a serious situation that could have significant effects across a wide range of fields, we must eliminate or minimize such concerns. Financial markets have already been shaken, as shown by volatility in exchange rates and stock prices, and this needs to be swiftly brought under control. I do not believe that the effects of Brexit will be as severe as those of the Lehman Shock, but the key priority is to avert such a crisis. I ask market players to respond calmly. I would also like to request that the Japanese government and the Bank of Japan react appropriately, and I welcome their prompt and appropriate responses since the referendum result became clear.

The greatest concerns for the Japanese economy are that uncertainties such as yen appreciation and weak stock prices will be prolonged and that corporate performance will decline, which will lead to vigorless management characterised by capital investment decrease. Further frugality in individual consumption is another anxiety. Addressing such issues should be the top priority in the economic measures planned for this fall. A unified effort from the government and the business community is required. I hope that the government and the Bank of Japan will also implement appropriate responses and deliver timely messages to calm markets.

Japanese companies have more than 1,000 operating units in the UK. Companies have been choosing the UK for investment in the context of the UK being a member of the EU. It is not yet clear what form Brexit negotiations will take, but depending on proceedings, Japanese companies may need to review or rebuild their global strategies, particularly those for Europe. The UK is still only at the stage of announcing the referendum results, the Leave campaign won, and withdrawal negotiations will continue for two years. Japanese companies have made major investments in the UK, therefore I hope that, through Brexit negotiations, the UK will maintain its international competitiveness and business environment.

The Importance of Globalization

Globalization in a free trade environment is a mechanism for achieving growth and prosperity in the world, which the international society should aim for. Globalization is also a key prerequisite and the most important factor for growth of corporations. The Japanese government has built economic partnerships with other countries and developed free trade systems. Brexit runs counter to the development of globalization. The mechanism for growth and prosperity embodied in the free trade systems built by the G7 is a crucial precondition for a healthy global economy and should be maintained.

In some countries, issues such as inequality and migration are giving rise to nationalism, isolationism, and protectionism. The G7 nations need to cooperate in addressing this trend. Japan is chairing G7 this year, and I hope that Prime Minister Abe and the Japanese government will take leadership in halting the spread of such tendencies.

Economic Policy

Prime Minister Abe has announced his intention to implement a bold and comprehensive economic stimulus package this fall. Economic measures are increasingly vital following Brexit. The details and scope of the package are yet to be discussed, but I will actively participate in deliberations through the Council on Economic and Fiscal Policy. In particular, a negative spiral whereby prolonged consumer frugality and vigorless corporate management leads to stagnating consumption and investment must be avoided at all costs. Bold, wide-ranging policy measures are required to change the mindsets of consumers and corporate managers.

Exchange Rates

Exchange rates have been volatile in the wake of the UK's decision to leave the EU. The real economy remains unchanged, and since this volatility can be regarded as an overreaction driven by speculative moves, a cool-headed response is required. We will gather information accurately and quickly. I expect swift and appropriate responses from the Bank of Japan and financial authorities.

Policy Priorities

The UK's decision to withdraw from the EU has raised major uncertainties for the Japanese economy just as Japan was rising to the challenge of achieving its ambitious goals of a positive primary balance and GDP of 600 trillion yen by 2020. Minimizing the impact of uncertainties associated with Brexit is the most urgent priority, and it is important for the public and private sectors to make a unified effort.

Reform of social security systems has long been another important policy issue, and must not be postponed. The government needs to place priority on addressing social security system reforms related to child rearing and nursing care and alleviating concerns about the future. Achieving GDP of 600 trillion yen is imperative, and we must resolutely implement the "Public-Private Strategic Project 10" that was included in the Japan Revitalization Strategy 2016 with a view to accomplishing nominal economic growth of 3% and real economic growth of 2%.